This note was originally published at 8am on December 15, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“For many people the “long run” quickly becomes the short run.”
-Ludwig von Mises
It’s both amazing and frightening that some US-centric investors can call rising European bond yields “pigs” and, at the same time, call the current breakout in US sovereign bond yields bullish because it’s all about US “growth.” If you are being forced to chase your “long run” stock ideas here into the short run of year-end, be forewarned – feeding The Ber-nank’s Pig comes with globally interconnected risk.
In hedge fund speak, we call a position that goes straight down a pig. Although I have never managed risk on a long only desk, I’m hearing that they call charts that look like Spanish Equities (EWP) and short-term Treasury Bonds (SHY) iggy little piggies too.
Obviously there is a confirmation bias embedded in US markets to lean bullish. As a result, not being wrong 82.6% of the time on the short side (Hedgeye’s batting average on shorts since 2008) isn’t easy to do. Sometimes however, the perma-bulls start to trip all over themselves painting every bearish and bullish data point as, well, bullish. This little piggy has a funny way of making its way to the market AFTER stocks have moved.
This morning’s Institutional Investor Bullish to Bearish Survey marked a new cycle-high in terms of the spread between de Bulls and da Bears:
- Bullish sentiment ramped to 56.8%
- Bearish sentiment dropped to 20.5%
- The spread (bulls minus bears) = +36.3%
In the short-run, we have finally bumped up against the widest bullish bias the US stock market has seen since April 2010. This may or may not matter to the “buy stocks for the long run” bulls, but we think the April peak to July trough drop of -15% left a mark.
In the long-run, the Bullish/Bearish Spread has never sustained a level north of 40. Historically speaking, never is a long time. The last time we saw the +40 handle raid the bears to the upside was at the beginning of 2008. Not exactly the best buy-and-hope signal that was…
Last night on Kudlow, I attempted to remind one of the 2008 bulls (Don Luskin) what the confluence of a pending slowdown in global growth and rising global inflation means for stocks in the intermediate term. He didn’t like that reminder.
This morning, in hopes of not being labeled one of the “world is awash with liquidity” 2008 dudes, I’m going to make sure that I am crystal clear on this – the rise in sovereign bond yields from Portugal (who printed 3 MONTH bills this morning at 3.4% versus 1.81% in the last auction!) to California is NOT a bullish leading indicator for 2011 “growth.”
No, that doesn’t mean I’m suggesting that last month’s US Retail Sales number wasn’t good. Neither am I saying that last month’s breakdown in domestic and emerging bond markets was either. We, as risk managers, aren’t tasked with trumpeting the +83.6% US stock market move that’s already behind us. We need to play the risk management game that’s in front of us.
So let’s strap on the multi-factor, multi-duration, global macro pants and take a walk down the path of what’s new out there this morning other than Portuguese pigs getting plugged:
- China and Hong Kong equities closed down another -0.54% and -1.95% overnight, respectively. Both remain broken on our immediate term TRADE duration. Growth in Asia will slow, sequentially, until Q2 of 2011.
- Indian equities closed down another -0.76% and remain bearish on both our immediate and intermediate-term TRADE and TREND durations. The trajectory of India’s 2011 growth could slow materially against very tough 2010 compares.
- Spanish and Italian stocks markets are getting crushed again after rallying to lower intermediate-term highs as European bond yields continue to rise in the face of sovereign debt and inflation risks.
- Sweden’s Riksbank raised interest rates on its 7-day repo rate to 1.25% in order to proactively protect against inflation.
- Turkish equities (a hot spot in the buy everything emerging markets land of nod) continue to underperform and are down another -1.3% this morning as local inflation pushes towards the double digit zone (yes, inflation is bad for emerging markets – it starves their people).
- Brazil was down another -0.55% yesterday and traded back below its intermediate-term TREND line of support for the Bovespa = 69,005. Brazil’s GDP growth slowed to 6.7% in Q3 vs. +9.2% in Q2 and inflation just ticked up again, sequentially, to +5.6% in November.
Notwithstanding that everything that I just wrote equates to a real-time read through on Global Growth Slowing in the in the next 3-6 months, what’s most interesting here is that every US centric stock market news service hasn’t mentioned any of them!
US tax cuts are good for short-run spending and political popularity (unless you are long Best Buy), but what have they done to the world’s long run expectations of American fiscal resolve? Have we learned nothing about the short-termism associated with begging for “shock and awe” easing in early 2008? Or are we, sadly, just feeding the pig until we get to year-end and collect our high/low society bonuses?
My immediate term lines of support and resistance for the SP500 are now 1230 and 1246, respectively. I’m early in being short the US stock market here – I get that. I was in late 2007, too. But don’t forget that I was also early buying the US Dollar (UUP) in November and shorting US Treasuries (SHY) and Munis (MUB). This globally interconnected game of risk is no longer all about buying US stocks for the “long run.”
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer